GENERATING WEALTH BY THE POWER OF LEVERAGING
Most commercial real estate transactions are not purchased with 100% cash, but rather 20% to 30% cash down, the rest paid with a mortgage. This ability to buy assets that exceed immediate cash available allows one to build wealth rapidly. Here’s how this unique attribute of commercial real estate works. A commercial property is purchased for $1,000,000, with $200,000 down and a $800,000 mortgage. Over time rents go up 50%, and the property is then sold for $1,500,000. The net profit on the sale is $500,000. But instead of a 50% return on the investment, that $500,000 is a 250% return on the original $200,000 down payment. Banks are comfortable with the values of commercial real estate because the are derived from rational calculations – stable rents – while stocks are often irrational with considerable fluctuations which scare banks. Because of leverage, investors are able to create much greater gains than any other form of investment.